Stock experts offer poor reviews on taxing bonuses

Congressional action to tax AIG bonuses could backfire, analysts say

By

KateGibson

DeborahLevine

NEW YORK (MarketWatch) - Market analysts on Friday raised concerns over the AIG bonus uproar, saying it could curb moves to bolster the nation's tattered financial system and further jeopardize the very banks the government is trying to rescue.

Anger over the $165 million in bonuses paid by American International Group Inc.
AIG, +1.39%
after the troubled insurance giant drew $173 billion in federal bailout money prompted the House on Thursday night to vote to impose a 90% tax on the payouts by AIG and other companies that get large amounts of taxpayer rescue funds.

A Senate version of the bill would tax bonuses at firms that drew as little as $100 million in federal bailout help, although at a lower rate.

Amid the brouhaha it was fairly clear the situation had little to no bearing on the market and stock prices, yet "Congress has now made this a situation equity prices should care about," said Dan Greenhaus, an equity analyst at Miller Tabak & Co.

"While I totally understand the desire to recoup the bonus money, passing this bill out of anger and rage will only destroy the competitiveness of the industry and the banks you are trying to save. It is that simple," said Greenhaus.

'While I totally understand the desire to recoup the bonus money, passing this bill out of anger and rage will only destroy the competitiveness of the industry and the banks you are trying to save.'
-- Dan Greenhaus, Miller Tabak &amp; Co.

The market's recent rebound, which saw the financial sector picking up some steam, was hindered by the bonus furor, said Andrew Brenner, senior vice president, MFGlobal.

"They've been trying to let people know the U.S. government is behind the financial system, and we started to see some momentum off the lows, with a move up in some financial stocks. All of a sudden, we topped that out. It (the AIG controversy) is the kind of thing that has added uncertainty," he said.

"My general feeling is whenever you have legislation done in a bout of anger, nothing good comes from it," said Andrew Brenner, senior vice president, MFGlobal.

Chilling

Robert Mellman, an economist at J.P. Morgan, said the fiasco surrounding the bonuses to AIG employees is already having a chilling effect on companies that the government is hoping will participate in programs to get toxic assets off of banks' balance sheets. The TALF program may end up only moving around $150 billion in assets, instead of the roughly $1 trillion to government had initially estimated, he said.

"A lot of people don't want to get involved in a government program," Mellman said. "Big potential buyers were scared away."

Congress should focus on the larger issues, and avoid confusing politics with the bigger goal of shoring up the nation's banks and fixing the economy, said Kevin Giddis, head of fixed income trading at Morgan Keegan & Co.

"The only thing I will say about this absurd attempt to send a message to those who need the reminder of whose money is at risk, is that if you take enough money out of the free market system, you just might be able to prolong the recession just long enough for communism to look like a good alternative to creating wealth," said Giddis.

Dean Curnutt, president, Macro Risk Advisors, pointing to concerns recently expressed by Federal Reserve Chairman Ben Bernanke that the nation might run out of the political will to see through the process underway to salvage the financial system,

"We have a very fragile banking system that needs a great deal of help. The worry is the progress we've made so far, that we put that at risk; in some ways that happened this week," Curnutt said.

Greenhaus contends the proposal would "absolutely and unequivocally destroy the ability of some of these firms to rebound as it will absolutely and unequivocally drive employees away from the companies to foreign banks like, say Deutsche Bank."

The congressional moves largely come down to "theater and noise," said Nicolas Colas, chief market strategist, BNY ConvergEx. But, the situation also comes with "important ramifications if the market perceives Congress is going to turn off the spigot when we're still in the middle of a crisis," Colas said.

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